Liquidity 4.0 - navigating a new reality

22 / 06 / 2023

For some time, banks have been facing the return of inflation and money at a cost. Higher interest rates, higher volatility, higher credit risk, and growing collateral requirements combined with regional conflicts and supply chain delays have a situation of uncertainty and complexity.

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Ongoing progress in the payment industry will increase tension on liquidity. What will have the most significant impact, and how can banks adjust to today's reality? At EBAday 2023, an expert panel discussed many of these challenges and their related opportunities in detail.

Evolution at a domestic level
At the domestic level, two significant changes will strongly impact liquidity, the first being the ramp-up of Instant Payments. Pushed by EC regulation, this will modify the timeline for liquidity requirements. In a batch ACH, the post-exchange net balance is to be funded on the pooled liquidity at a central bank account; in an IP CSM, a separate buffer must be pre-funded to enable real-time settlement.

An issue here is that there is no right to fail in the planned liquidity as there is no chance to react in due time, which leads to setting larger buffers. This impacts both intraday liquidities – where the total amount of available assets is increased to cover larger liquidity requirements- and global liquidity – since buffers left at night and for weekends are not considered in mandatory reserves. All bank defaults across the market have demonstrated a lack of strong liquidity risk management.

The second most impactful change will be the implementation and ramp-up of Central Bank Digital Currencies (CBDC), such as the Digital Euro. Consider that money stored in CBDC wallets is no longer held in bank accounts. Even with a cap planned for implementation by the European Central Bank, this represents lots of liquidity. This liquidity currently secured the banks' liquidity profile at zero or a very low cost. Central bankers plan to replace this via generous monetary policies, but this liquidity will quickly become costly and must be collateralised.

'Instant' the norm at a global level
Countless initiatives aim to provide a smooth, quick and transparent worldwide payment system that will become a regulatory requirement by 2027. This alone represents a challenging business requirement to offer competitive payment services and retain your clients.

This upcoming change also creates opportunities. Each initiative requires Foreign Exchange (FX) and Liquidity provider roles. These are tremendous business opportunities in clearing services where the competition will be driven by the lowest FX or liquidity prices and the best processing capabilities to ensure support of new settlement workflows.

The impact on liquidity management is derived from an acceleration of payments. Real-time comprehensive and accurate monitoring of positions and associated risks is key to properly managing activity and preventing liquidity risks. This is the case for fiat currencies and all new types of assets used for cross-border payments that will be as many additional liquidity buffers to be managed.

As shared in the session at EBADay, ‘everything in real-time creates chaos’. There is much complexity to be resolved, with corporate and private clients moving money quickly, which must be managed and processed. While financial markets operate only Monday to Friday, global liquidity needs have extended beyond this. So, the question for banks is how to cope with 24/7 funding and payment support.

Information gathering will be key
The collection of information to secure proprietary positions is also the basis of enhancing liquidity management services to clients, who will also be confronted with managing their own liquidity in an accelerated world. From Worldline’s perspective and that of the panellists, real-time information and forecasting are key to navigating the new reality of liquidity management. During the session, panellists suggested that today represents the best time in a generation for banks to make money from transaction banking. So, the opportunities are present – it’s down to banks to utilise effective liquidity information services to position themselves better.

Effective liquidity consoles must collect and consolidate information from all types of internal and external sources to provide liquidity forecast, real-time monitoring and reconciliation. This responds to the first requirement from both bank’s treasury and client corporate treasurers: real-time balance visibility. To navigate the new reality, they must be associated with a data warehouse as a basis for data history analysis, enhanced forecast and stress tests.

Liquidity consoles must also include the levers for quick actions in intraday liquidity distribution or additional liquidity provision. This addresses their second requirement: real-time account sweeps. The latter includes the associated collateral provision and interaction with the future Eurosystem Collateral Management System platform (ECMS, to come early in 2024) when dealing with central bank credit in the euro.

To navigate the new reality, they must be associated with a data warehouse as a basis for data history analysis, enhanced forecast and stress tests. There also has to be a level of interaction with payment processing to control payment outflow, fine-tune intraday liquidity profiles, and secure credit risk – especially in contingency situations. Information gathering also aids in assessing “what if” scenarios, in which stress tests, probably lead to additional liquidity buffers or ratio requirements. Ultimately, if banks can harness the power of analysis and effective data gathering, they position themselves better in an exciting but highly competitive financial world.


Learn more about Worldline's Payment & Liquidity Management solutions.


Pierre Calvet

Product Marketing Manager Payment & Liquidity Solutions
After having managed back-office organisation and systems for FX, MM and FX-Options in a large French bank, Pierre has been working for 20 years in the payments industry as a business consultant and business developer. He is responsible for defining and marketing our “Payment & Liquidity Management” software package offerings.